Picard, as Trustee for the Liquidation of Bernard v. Mayer et al

NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION, 	No. 08-01789 (CGM)
Plaintiff-Applicant, 	SIPA LIQUIDATION
v. 	(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
IRVING H. PICARD, Trustee for the Liquidation of
Bernard L. Madoff Investment Securities LLC,
Adv. Pro. No. 20-01316 (CGM)Plaintiff,
v.
Rafael Mayer,
David Mayer,
MONTPELLIER INTERNATIONAL LTD.,
PRINCE ASSETS LTD. (f/k/a PRINCE ASSETS
LDC),
PRINCE RESOURCES LDC,
MONTPELLIER USA HOLDINGS LLC,
KHRONOS LIQUID OPPORTUNITIES FUND LTD,
and PRINCE CAPITAL PARTNERS LLC,
Defendants.
MEMORANDUM DECISION DENYING MOTIONS TO DISMISS
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A P P E A R A N C E S :
BAKER HOSTETLER LLP
Attorneys for the Plaintiff
45 Rockefeller Plaza
New York, N.Y. 10111
BY: 	JASON OLIVER (via Zoomgov)
CARRIE LONGSTAFF (via Zoomgov)
YANKWITT LLP
Attorneys for Defendant Khronos Liquid Opportunities Fund Ltd.
140 Grand Street, Suite 705
White Plains, N.Y. 10601
BY: 	DANIEL ALTER (via Zoomgov)
BINDER & SCHWARTZ LLP
Attorneys for Defendant Rafael Mayer
366 Madison Avenue, Sixth Floor
New York, New York 10017
BY: 	ERIC FISHER (via Zoomgov)
COHEN & GRESSER LLP
Attorneys for Defendants Prince Resources LDC and Prince Capital Partners LLC
800 Third Avenue, 21st Floor
New York, New York 10022
BY: 	DANIEL TABAK (via Zoomgov)
TEARNS WEAVER MILLER
Attorney for David Mayer, Individually
Museum Tower
150 West Flagler Street, Suite 2200
Miami, FL 33130
BY: 	CARLOS CANINO (via Zoomgov)
EUGENE STEARNS (via Zoomgov)
MATTHEW GRAHAM (via Zoomgov)
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
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I. 	Jurisdiction
This is an adversary proceeding commenced in this Court, in which the main underlying
SIPA proceeding, No. 08-01789 (CGM), is pending. The SIPA proceeding was originally
brought in the United States District Court for the Southern District of New York as Securities
Exchange Commission v. Bernard L. Madoff Investment Securities LLC, et al., No. 08 CV 10791
and has been referred to this Court. This Court has jurisdiction over this adversary proceeding
under 28 U.S.C. § 1334(b) and (e)(1), and SIPA § 78eee(b)(2)(A) and (b)(4). This is a core
proceeding under 28 U.S.C. §§ 157(b)(2)(A), (H), and (O).
II. Background
The Complaint arises in connection with the infamous Ponzi scheme perpetrated by
Bernard L. Madoff (“Madoff”) through his investment company, Bernard L. Madoff Investment
Securities, LLC (“BLMIS”). As recognized by the Securities Investor Protection Corporation
(“SIPC”), this is not a typical SIPC proceeding in which securities or cash were on hand at the
time of the failure of the brokerage house. Picard v. Merkin (In re BLMIS), 440 B.R. 243
(Bankr. S.D.N.Y. 2010). It was a fraud of “unparalleled magnitude” in which the only assets
available to pay customer claims were “other people’s money or assets derived from such
funds.” In re BLMIS, LLC, 445 B.R. 206, 215 (Bankr. S.D.N.Y. 2011).
The Trustee holds a final judgment against Legacy Capital Ltd. (“Legacy Capital”) in the
amount of $79,125,781.00.1 Legacy Capital was a single purpose vehicle invested solely with
BLMIS. Through this lawsuit, the Trustee is seeking to recover $49,505,850 in subsequent
transfers (“Subsequent Transfers”) of BLMIS’s customer property that Legacy Capital allegedly
made to Montpellier International Ltd. (“Montpellier”) and Prince Assets Ltd. (“Prince”). At the
1 See Picard v. Legacy Capital Ltd. (In re BLMIS, LLC), Adv. Pro. No. 10-05286 (CGM) (Bankr. S.D.N.Y.) (the
“Legacy Adversary Proceeding”).
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time that Montpellier and Prince allegedly received the Subsequent Transfers, these two entities
were part of a network of entities that included the other Defendants, and were allegedly
controlled by Rafael (“Rafael”) and David (“David”) Mayer (together, the “Mayers”).
In the complaint (“Complaint”), the Trustee alleges that after learning about BLMIS’s
fraud, the Mayers altered the structure of Montpellier and Prince and liquidated the companies in
order to conceal the Subsequent Transfers and prevent their being clawed back. Compl. ¶ 5,
ECF No. 1.
It is alleged that “Montpellier received [one payment of] $50,000,000 on September 4,
2007—which . . . included up to approximately $12,505,850 of fictitious profits—and [a second
payment of] $27,000,000, consisting entirely of fictitious profits, on October 4, 2007. Prince
received $10,000,000, consisting entirely of fictitious profits, on June 6, 2008.” Id. ¶ 61.
Montpellier allegedly transferred $39,505,850 to Montpellier Resources Limited, which later
changed its name to the Khronos Group (“Khronos Group”). Id. ¶ 63. It is alleged that Khronos
Group subsequently transferred some of those funds to Montpellier USA and Prince. Id. ¶¶ 64–
65. Prince allegedly transferred its Subsequent Transfer funds to Prince Resources LDC (“Prince
Resources”); and Prince Resources transferred funds to Prince Capital Partners LLC (“Prince
Capital”). Id. ¶¶ 66–67.
As part of the Trustee’s efforts to collect BLMIS’s customer property, the Trustee issued
a subpoena for an examination under Federal Rule of Bankruptcy Procedure 2004 on Rafael and
Khronos LLC dated July 7, 2010. Id. ¶ 98; Warshavsky Declar., ECF No. 45, ex.1A. As part of
the subpoena, the Trustee requested the production of documents relating to subsequent transfers
of customer property. Compl. ¶ 98. These documents were ultimately produced on October 6,
2010, after a motion to quash was filed and denied. Id. ¶ 111.
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While the production of documents in response to that 2004 subpoena was outstanding,
around August 2010, Khronos LLC and the Mayers allegedly began dismantling the
“Montpellier Group,”2 which was a “labyrinthine structure” comprised of private investment
vehicles owned by the Mayers, their family members and close associates. Id. ¶¶ 68, 71.
Montpellier Group was replaced with a “structure centered around” Khronos Liquid. Id. ¶ 72.
Around that same time, various corporations that were allegedly controlled by the Mayers,
changed their names from Montpellier related names to Khronos related names, “including
Khronos Group LLC (f/k/a Montpellier LLC), Khronos LOF Holdings LLC (f/k/a Montpellier
USA Redemption Holdings LLC), and Khronos LOF Investments LP (f/k/a Montpellier
Investments LP). Id. ¶ 102.
Then in January 2017, right after the close of factual discovery in the Legacy Adversary
Proceeding, Montpellier, allegedly, voluntarily wound up under the laws of Bermuda. Id. ¶ 103.
Rafael served as director during the dissolution. Id. ¶ 103. No notice was provided to the
Trustee of the dissolution. Id. ¶ 103. In September of 2017, Khronos Group was dissolved after
a voluntary liquidation in which Rafael served as liquidator. Id. ¶ 104. Again, no notice was
provided to the Trustee. Id. ¶ 104.
In April 2019, David served as liquidator and oversaw the dissolution and liquidation of
Prince, an alleged holder of Subsequent Transfer funds. Id. ¶ 105. No notice was provided to the
Trustee. Id. ¶ 105.
The Trustee asks the Court to pierce the corporate veil and make the Mayers personally
liable for the Subsequent Transfers.
2 It is not clear from the Complaint which entities make up the “Montpellier Group.” The Complaint defines it as:
“Montpellier served as a holding company in a larger investment fund complex that operated as a fund-of-funds (the
‘Montpellier Group’). The Montpellier Group comprised numerous entities incorporated in different jurisdictions
that were, in one way or another, connected to Montpellier Resources (later Khronos Group), a Bermuda entity that
acted as the master fund.”
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Before the Court are three separate motions to dismiss.3 	Khronos Liquid Opportunities
Fund, Ltd. (“Khronos Liquid aka ‘KLOF’”) moves to dismiss for lack of personal jurisdiction
and for failure to state a claim. Memo. L., ECF No. 18. Rafael moves to dismiss for failure to
state a claim arguing that the Trustee has failed to plead a claim for alter ego and failed to plead
that Rafael received the funds in question, among other things. Memo. L., ECF No. 22. David
also filed a motion to dismiss based upon improper group pleading, failure to properly plead an
alter ego claim, and failure to allege David received the funds in question. Memo. L., ECF No.
26.
The Court held a hearing to consider the motions on September 15, 2021. See Hr’g Tr.
116–178, ECF No. 97.
III. Discussion
A. Khronos Liquid
i. Personal Jurisdiction under Fed. R. Civ. P. 12(b)(2)
Khronos Liquid argues that the case should be dismissed against it for lack of personal
jurisdiction, pursuant to Federal Rule of Civil Procedure 12(b)(2) and (6). Although Khronos
Liquid is a company organized under the laws of the Cayman Islands, the Trustee alleges that it
purposefully availed itself to the laws of the United States and the state of New York by
undertaking “significant commercial activities” in New York and that it “derives significant
revenue” from New York. Compl. ¶ 12. The Trustee also alleges that Khronos Liquid is
managed by Rafael in New York. Id.
3 Prince Resources and Prince Capital filed a motion to dismiss arguing that the Trustee has failed to plead lack of
good faith with regards to each Subsequent Transfer, including those allegedly made to them. Memo. L., ECF No.
27. This motion has been withdrawn.
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While it is well established that a plaintiff bears the burden of establishing the Court’s
personal jurisdiction over a particular defendant, the showing that a plaintiff must make “varies
depending on the procedural posture” of the case. Bissonnette v. Podlaski, 138 F. Supp. 3d 616,
621–22 (S.D.N.Y. 2015). To meet this burden at the pleading stage, the plaintiff need only to
make “a prima facie showing of jurisdiction through its own affidavits and supporting materials.”
Id. (citations omitted). This burden can be met by making legally sufficient allegations and an
averment of facts that, when taken as true, would suffice to establish jurisdiction. Id.
The Trustee alleges that there is general jurisdiction over Khronos Liquid under the
“nerve center” test. 	General jurisdiction may be asserted over a corporation in the place of
incorporation and principal place of business.4 Daimler AG v. Bauman, 571 U.S. 117, 137
(2014). The “principal place of business” is the “nerve center” of the business or “the place
where a corporation’s officers direct, control, and coordinate the corporation’s activities.” Hertz
Corp. v. Friend, 559 U.S. 77, 92 (2010).
Despite being incorporated under the laws of the Cayman Islands, Khronos Liquid
allegedly has no operations in that country. Instead, Khronos Liquid is alleged to be run out of
New York where all its officers and directors are based. Compl. ¶ 20 (Khronos Liquid was
managed by a New York based LLC); see also ¶ 80 (“At all relevant times, the entities
comprising the Montpellier Group, the Prince master fund structure, and the [Khronos Liquid]
master fund structure shared directors, officers, beneficial ownership, shareholders, business
operations, and offices.”). The Trustee provided copies of official SEC forms demonstrating that
4 At oral argument, counsel for Khronos Liquid asked this Court to focus on a specific quote in Gucci Am., Inc. v.
Weixing Li, 768 F.3d 122, 135 (2d Cir. 2014): “[O]nly where its contacts are so continuous and systematic, judged
against the corporation’s national and global activities, that it is essentially at home in that state.” Hr’g Tr. 174:17-
20. In Gucci, the Court of Appeals for the Second Circuit interpreted Daimler and explained in the very next
sentence that “a corporation is at home (and thus subject to general jurisdiction, consistent with due process) only in
a state that is the company’s formal place of incorporation or its principal place of business.” Gucci, 768 F.3d at
135.
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for the years 2011 through 2020 the majority of Khronos Liquid’s directors and officers were
located in New York. See Warshavksy Decl., Exs. 13–22. Additionally, Khronos Liquid
allegedly derives significant revenue from New York. Compl. ¶ 12; see also Warshavksy Decl.,
Ex. 26 (showing Khronos Liquid listed under “Dealers; Brokers” in the N.Y. State register of
securities offerings). These allegations are sufficient to demonstrate a prima facie showing that
Khronos Liquid is “essentially at home” in New York and general jurisdiction may be asserted
over Khronos Liquid. Daimler AG v. Baum, 571 U.S. 117, 137 (2014).
The Trustee also alleges that specific jurisdiction may be asserted over Khronos Liquid.
“The inquiry whether a forum State may assert specific jurisdiction over a nonresident defendant
focuses on the relationship among the defendant, the forum, and the litigation.” Walden v. Fiore,
571 U.S. 277, 283-84 (2014) (quotation marks and citations omitted). The Complaint asserts that
Khronos Liquid received the Subsequent Transfer funds from Montpellier/Khronos. It is alleged
that Khronos Liquid “succeeded and took over for” Montpellier/Khronos. Compl. ¶ 94. It is
alleged that Khronos Liquid received the assets of Montpellier Resources, which included
subsequent transfer funds. Id. ¶ 93. The Trustee also alleges that the Mayers created Khronos
Liquid to prevent the Trustee from collecting the subsequent transfers from Montpellier and
Khronos and that Khronos Liquid was managed by Khronos LLC, a New York limited liability
company. Id. ¶ 110. Khronos Liquid is alleged to have received the Subsequent Transfers with
knowledge that they were BLMIS’s customer property.
Khronos Liquid argues that none of the Subsequent Transfers were transferred to it upon
its creation, as the Trustee has alleged. The Trustee has made a prima facie showing that
Khronos Liquid had sufficient minimum contacts with the United States, specifically New
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York,5 regarding the services rendered in connection with the other Defendants, and any related
transfers arose out of those contacts and were the proximate cause of the injuries the Trustee
seeks to redress in this action. SIPC v. BLMIS, LLC, 594 B.R. 167, 191 (Bankr. S.D.N.Y. 2018);
see also Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 170 (2d Cir. 2013) (“We
conclude that the selection and repeated use of New York’s banking system, as an instrument for
accomplishing the alleged wrongs for which the plaintiffs seek redress, constitutes purposeful
availment of the privilege of doing business in New York, so as to permit the subjecting of [a
foreign Defendant] to specific jurisdiction within the Southern District of New York consistent
with due process requirements.”). Whether Khronos Liquid actually received these funds is an
issue to be determined by this Court after discovery.
The exercise of personal jurisdiction over Khronos Liquid comports with traditional
notions of fair play and substantial justice as many of Khronos Liquid’s officers and directors are
located in New York, it is managed by a New York based company, and it has capable New
York counsel.
ii. Failure to state a claim under Fed. R. Civ. P. 12(b)(6)
The Trustee has moved to avoid the Subsequent Transfers under § 550 of the Bankruptcy
Code. Section 550(a) states:
Except as otherwise provided in this section, to the extent that a transfer is avoided
under section . . . 548 . . . of this title, the trustee may recover, for the benefit of the
estate, the property transferred, or, if the court so orders, the value of such
property, from-- (1) the initial transferee of such transfer or the entity for whose
benefit such transfer was made; or (2) any immediate or mediate transferee of such
initial transferee.
5 “We pause to note that, despite the fact that section 302(a)(1) of New York’s long-arm statute and constitutional
due process are not coextensive, and that personal jurisdiction permitted under the long-arm statute may
theoretically be prohibited under due process analysis, we would expect such cases to be rare.” Licci v. Lebanese
Canadian Bank, SAL, 732 F.3d 161, 170 (2d Cir. 2013)
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Khronos Liquid argues that the Trustee has failed to state a claim by failing to allege that
the funds at issue originated with BLMIS. Simultaneously, Khronos Liquid cites the portion of
the Complaint where the Trustee asserts the Subsequent Transfers took place: “starting on July
26, 2011, Khronos Group supposedly transferred approximately $109 million to KLOF,
designated as ‘in connection with the Continuing Fund.’” Kronos Liquid Memo. L. 4, ECF No.
18. 	The Trustee has alleged that the Mayers created Khronos Liquid and transferred millions of
dollars to it with the intent of hiding the Subsequent Transfers made to Montpellier and Prince.
Compl. ¶ 94. The Transfers to Khronos Liquid from Montpellier are alleged to have come from
Legacy Capital, which originated with BLMIS. Compl. ¶ 2. (“With this Complaint, the Trustee
seeks to recover approximately $49,505,850 in subsequent transfers of BLMIS customer
property . . . made to Montpellier and Prince by Legacy Capital Ltd. . . . , which was a single
purpose vehicle invested solely with BLMIS and organized under the laws of the British Virgin
Islands.”).
Khronos Liquid argues that the claim has not been plead with enough specificity as to
how and what Subsequent Transfers Khronos Liquid received. Khronos Liquid argues that it is
not alleged “that the defendant is a subsequent transferee of that initial transfer” as is required
under § 550 of the Bankruptcy Code. Reply at 15, ECF No 49.
The Court disagrees. “To survive a motion to dismiss, the complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (cleaned up). The claim is facially plausible when a
plaintiff pleads facts that allow the Court to draw a “reasonable inference that the defendant is
liable for the misconduct alleged.” Id. “The plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”
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Id.; see also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007) (“Asking for plausible
grounds to infer an agreement does not impose a probability requirement at the pleading stage; it
simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence
of illegal agreement.”). In deciding a motion to dismiss, the Court should assume the factual
allegations are true and determine whether, when read together, they plausibly give rise to an
entitlement of relief. Iqbal, 556 U.S. at 679. “And, of course, a well-pleaded complaint may
proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a
recovery is very remote and unlikely.” Twombly, 550 U.S. at 556.
As has previously been stated by this Court,
the Trustee is an outsider to these transactions and will need discovery to identify
the specific subsequent transfers by date, amount and the manner in which they
were effected. The Moving Defendants are a group of interrelated individuals and
entities . . . . Whether they additionally received Subsequent Transfers of BLMIS
funds from one another is a question to which they, and they alone, have the
requisite information to respond.
In re BLMIS, LLC, 445 B.R. 206, 236 (Bankr. S.D.N.Y. 2011). The Complaint contains
sufficient information regarding which transfers the Trustee is seeking to recover.6 Compl. ¶ 93–
95 (“Upon information and belief, after KLOF was registered in 2011, the Liquid Opportunities
Fund Segregated Account and the Continuing Class assets were transferred to KLOF. Upon
information and belief, beginning on July 26, 2011, KGL transferred $109,253,099 to KLOF.
Upon information and belief, after this date, KLOF succeeded and took over for Khronos Group.
The Montpellier Subsequent Transfers received by Khronos Group are therefore recoverable
from KLOF. Ledger entries note that these payments were in connection with the
6 As part of its opposition to this motion, Khronos Liquid filed a declaration of Rafael Mayer that included fourteen
exhibits in an attempt to demonstrate that Khronos Liquid did not do what the Trustee has alleged that it did. Decl.
R. Mayer, ECF No. 20. At this stage of the litigation, the Court need not concern itself with whether the allegations
contained in the Complaint are plausible. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007).
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“Continuing Fund.”). The allegations contain plausible grounds to infer that Khronos Liquid
received the Subsequent Transfers as part of a scheme and that discovery may reveal additional
information on this scheme.
And Khronos Liquid knows what funds the Trustee is referring to because it has asserted
a factual defense to these specific allegations. Khronos Liquid Memo. L 15, ECF No. 18
(“Because the Khronos Group assets came solely from the Continuing Account they contained
no part of the Subsequent Transfers.”). Khronos Liquid’s motion to dismiss must be denied.
B. The Mayers
Rafael and David each brought a motion to dismiss asking the Court to dismiss them
from the case. At the September 15, 2021 hearing on this motion, David’s counsel argued that
the Trustee has alleged a claim of “aiding and abetting” a transfer. Hr’g Tr. at 172, ECF No. 97
(citing to Klein v. Tabatchnick, 610 F.2d 1043 n.4 (1979) and Stern v. Singh Factors, LLC (In re
Shore to Shore Realty Inc.), 2011 WL 350526, at *8 (Bankr. E.D.N.Y. 2011)). 	The Complaint
contains no counts for aiding and abetting a fraudulent transfer. It contains only one Count,
which is the recovery of Subsequent Transfers against all Defendants, pursuant to 11 U.S.C. §
550 and SIPA § 78fff-2(c)(3). Compl. 27. The Complaint does ask this Court to pierce the
corporate veil, (Id. ¶ 76) and this remedy is appropriate in subsequent transfer actions. See Shore
to Shore Realty, 2011 WL 350526, at *5 (“Where appropriate, a plaintiff may seek to pierce the
corporate veil of a corporation or an LLC to hold its owners liable for the debts of the
corporation or LLC.”).
i. 	Choice of Law for Piercing the Corporate Veil
The Defendants argue that Cayman Island and/or Delaware law should apply to the
Trustee’s veil piercing claims. The Trustee argues that New York law should apply. The choice
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of law rules of the forum state are used to determine which jurisdiction’s law governs a veil
piercing claim. In re Saba Enterprises, Inc., 421 B.R. 626, 648 (Bankr. S.D.N.Y. 2009). Under
New York choice of law principles, the law of the state of incorporation of the corporation
governs which law should be used to determine whether to pierce the corporate veil. Id. But see
Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 137 (2d Cir.
1991) (applying New York substantive law to veil piercing claims where parties have consented
by their conduct to that application).
a. 	New York
Khronos is a New York limited liability company and as such, New York law applies to
piercing its corporate veil. Compl. ¶ 20.
“Under New York law, courts may pierce the corporate veil either in the event of a fraud
or where the corporation has been so dominated by an individual or corporate parent that the
subsidiary is relegated to the status of a mere shell, instrumentality, or alter ego.” In re Saba
Enterprises, Inc., 421 B.R. 626, 650 (Bankr. S.D.N.Y. 2009). To determine whether a
corporation has been used as an alter ego, the Court of Appeals for the Second Circuit has set
forth the following ten factor test:
(1) the absence of the formalities and paraphernalia that are part and parcel of the
corporate existence, i.e., issuance of stock, election of directors, keeping of
corporate records and the like, (2) inadequate capitalization, (3) whether funds are
put in and taken out of the corporation for personal rather than corporate
purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common
office space, address and telephone numbers of corporate entities, (6) the amount
of business discretion displayed by the allegedly dominated corporation, (7)
whether the related corporations deal with the dominated corporation at arm[’]s
length, (8) whether the corporations are treated as independent profit centers, (9)
the payment or guarantee of debts of the dominated corporation by other
corporations in the group, and (10) whether the corporation in question had
property that was used by other of the corporations as if it were its own.
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Wm. Passalacqua Builders, Inc. v. Resnick Devs. S., Inc., 933 F.2d 131, 139 (2d Cir. 1991). 	No
factor is dispositive; the Court must conduct a fact intensive analysis. Saba, 421 B.R. at 650.
b. 	Delaware
Prince Capital is a Delaware limited liability company and Montpellier USA is a
dissolved Delaware limited liability company. Compl. ¶¶ 18, 17. As such, Delaware law applies
to the Trustee’s claims to pierce their corporate veils.
Under Delaware law, “a court can pierce the corporate veil of an entity where there is
fraud or where a subsidiary is in fact a mere instrumentality or alter ego of its owner.” Geyer v.
Ingersoll Publications Co., 621 A.2d 784, 793 (Del. Ct. Chancery 1992); see also Crosse v.
BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003) (“To state a ‘veil-piercing claim,’ the plaintiff must
plead facts supporting an inference that the corporation, through its alter-ego, has created a sham
entity designed to defraud investors and creditors.”).
To prevail on an alter ego theory, there is no requirement of a showing of fraud. Fletcher
v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995) (discussing Delaware veil piercing law); see also
Mobile Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989) (“Fraud is
frequently cited as a basis on which to pierce the corporate veil, but it is not the only one: It may
be done only in the interest of justice, when such matters as fraud, contravention of law or
contract, public wrong, or where equitable considerations are involved.”).
Rather, “a plaintiff must show (1) that the parent and the subsidiary operated as a single
economic entity and (2) that an overall element of injustice or unfairness is present.” Fletcher v.
Atex, Inc., 68 F.3d at 1457.
c. 	Cayman Islands and Bermuda (Montpellier, Khronos Group)
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Khronos Liquid, Prince Resources are companies organized under the laws of the
Cayman Islands. Compl. ¶ 12, 13. Prince was organized and dissolved under the laws of the
Cayman Islands. Id. ¶ 15. Khronos Group was organized and dissolved under the laws of
Bermuda. Id. ¶ 16. Montpellier was organized and dissolved under the laws of Bermuda. Id. ¶
14. British law applies to veil piercing claims against these entities.
The Mayers acknowledge that both the Cayman Islands and Bermuda follow the
decisions of the Supreme Court of United Kingdom on piercing the corporate veil. Decl. Potts
¶¶ 16-18, ECF No 23 & 26-1. The leading case on piercing the corporate veil under British law
is Prest v. Petrodel Resources Limited, [2013] UKSC 34.7 Under British law, a court may pierce
the corporate veil where: 1) an individual; 2) deliberately evades or frustrates a legal obligation;
3) by interposing a company under his control. Id. at 18, ¶ 35; see also Persad v. Singh, [2017]
UKPC 32 at 5, ¶ 158 (“[A] court may pierce the corporate veil when there is an abuse of the
corporate personality to evade or frustrate the legal consequences of one’s actions.”). Fraud is
not a requirement to piercing the corporate veil under British law, and yet, where fraud is proven,
“[n]o court in [Great Britain] will allow a person to keep an advantage which he has obtained by
fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been
obtained by fraud. Fraud unravels everything.” Prest v. Petrodel Resources Ltd., [2013] UKSC
34 at 9, ¶ 18.
The Mayers argue that there is no such thing as “alter ego” liability under the laws of the
Cayman Islands or Bermuda; yet, British law requires a finding that an individual “interpose a
company under his control” just as New York law requires that a corporation be “so dominated”
7 available at, https://www.supremecourt.uk/cases/docs/uksc-2013-0004-judgment.pdf
8 available at, https://www.jcpc.uk/cases/docs/jcpc-2016-0021-judgment.pdf
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by an individual, and Delaware law requires that a corporation is a “mere instrumentality” of its
owner.
They also argue that permitting a corporate veil to be pierced is “rare” under British law.
Rather than being rare, Lord Sumption advises that the principle is a “limited one” and yet, even
he recognized that “where the abuse of the corporate veil to evade or frustrate the law can be
addressed only by disregarding the legal personality of the company” piercing the veil “is . . .
consistent with authority and with long-standing principles of legal policy.” Id. at 18 ¶35.
ii. 	The Trustee has met his pleading burden for piercing the veil under New York,
Delaware, and British law
The Trustee has met his pleading burden under each of these tests for piercing the
corporate veil. In the Trustee’s Complaint, it is alleged that the Mayers abused the corporate
structures of the companies under their control for the purpose of evading and/or frustrating the
Trustee’s efforts to collect the Subsequent Transfers from them.
It is alleged that while the Trustee was in litigation with Legacy Capital, the Mayers
realized that Montpellier and Prince would ultimately be liable for millions of dollars of
BLMIS’s customer property under § 550 of the Bankruptcy Code as subsequent transferees.
Compl. ¶¶ 96–97. To avoid paying the Trustee these funds or in order to frustrate the Trustee’s
collection efforts in his attempts to collect these funds, the Mayers, knowingly, dismantled these
companies and moved the corporate assets to new companies with different names. Id. ¶ 98–
102. It is also alleged that the liquidation and/or dissolution of these companies was done
without informing the Trustee, despite his status as a creditor. Id. ¶¶ 103–106. The Trustee
alleges that the Mayers also hid the fact that the corporations were insolvent so that they could
liquidate their assets without court supervision. Id. ¶ 107.
a. 	New York law
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Under New York law, the Trustee must allege facts that, if proven, would demonstrate
that the Mayers used the Defendants as an “alter ego.” To prove that, the Trustee must allege:
(1) the absence of the formalities and paraphernalia that are part and parcel of the
corporate existence, i.e., issuance of stock, election of directors, keeping of
corporate records and the like, (2) inadequate capitalization, (3) whether funds are
put in and taken out of the corporation for personal rather than corporate
purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common
office space, address and telephone numbers of corporate entities, (6) the amount
of business discretion displayed by the allegedly dominated corporation, (7)
whether the related corporations deal with the dominated corporation at arm[’]s
length, (8) whether the corporations are treated as independent profit centers, (9)
the payment or guarantee of debts of the dominated corporation by other
corporations in the group, and (10) whether the corporation in question had
property that was used by other of the corporations as if it were its own.
Wm. Passalacqua Builders, Inc. v. Resnick Devs. S., Inc., 933 F.2d 131, 139 (2d Cir.
1991).
The Trustee has met this burden. He has alleged that Khronos’ funds were being used for
personal purposes (Compl. ¶ 70, 88); there was overlap in directors and officers (Id. ¶¶ 20, 69,
81); use of common office space (Id. ¶ 81); lack of arm’s length relationships (Id. ¶¶ 80-102);
lack of independence (Id. ¶¶80-102); payment of debts of the dominated corporation by other
corporations (Id. ¶¶ 84-99); and use of property by other corporations as if it were its own (Id. ¶¶
78, 82-99).
b. 	Delaware law
To meet his pleading burden under Delaware law, the Trustee must allege “that the parent
and the subsidiary operated as a single economic entity and (2) that an overall element of
injustice or unfairness is present.” Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995). In
addition to the aforementioned allegations, the Trustee also alleges that the Mayers created
Prince Capital to hide evidence relevant to a 2004 examination in this Court and to prevent the
Trustee from being able to trace the assets of Khronos. Compl. ¶¶ 111, 112 (“When Khronos
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finally disclosed the name of the entity that replaced it—no earlier than on the deadline set by the
Bankruptcy Court—the reason for Khronos’s obfuscation became clear. The new service
provider was Prince Capital, an entity affiliated with Khronos, and, of course, the Mayers.”).
This is sufficient to demonstrate an “overall element of injustice or unfairness.”
c. 	Cayman Islands and Bermuda law
Under British law, the Trustee must allege that the Mayers deliberately evaded or
frustrated a legal obligation by interposing the Defendants under their control. The Complaint
does so. The Trustee alleges that the Mayers knew of their legal obligation to turnover the
Subsequent Transfer funds and to provide whatever information was sought as part of the 2004
examination. Compl. ¶ 96–102 (alleging that the Mayers “misused the corporate form after
liability to the Trustee arose”) (cleaned up), ¶ 111 (alleging that the Mayers created a new
corporation and transferred corporate documents in an attempt to avoid responding to a subpoena
issued by this Court). The Trustee also alleged that the Mayers “breached their duty to the
Trustee, as a creditor of Montpellier, Prince and Khronos Group.” Id. ¶ 106.
iii. Failure to Plead that Mayers took Subsequent Transfers
The failure to plead that the Mayers took Subsequent Transfers is not fatal at this juncture
of the litigation. The Trustee need not demonstrate that the Mayers received the Subsequent
Transfers for liability to be imposed upon them. “[P]iercing the corporate veil . . . is not, in and
of itself, an independent cause of action but a procedural device through which a plaintiff may
assert facts and circumstances to persuade the court to impose the parent corporation's obligation
on the subsidiary or vice versa.” SIPC v. Stratton Oakmont, Inc., 234 B.R. 293, 321 (S.D.N.Y.
1999). see also Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (referring to the “alter ego theory of
parent liability” under Delaware law); In re Verizon Coverage Appeals, 222 A.3d 566, 570 (Del.
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2019) (referring to piercing the corporate veil as “alter ego liability”); Otto Candies, LLC v.
KPMG, LLP, 2020 WL 4917596, at *9 (Del. Ct. Chancery Aug. 21, 2020) (“Delaware law
presents two paths to vicarious liability: first, via veil-piercing, instrumentality, or alter-ego
theories, which focus on setting aside the corporate form due to the complete domination and
control of one entity over another; and second, via agency theory, which respects the corporate
form and instead focuses on wrongdoing authorized by one entity, but conducted by another.”).
Similarly, under British law, piercing the corporate veil is a liability shifting “principle” to be
used by courts “for the purpose, and only for the purpose, of depriving the company or its
controller of the advantage that they would otherwise have obtained by the company’s separate
legal personality.” Prest v. Petrodel Resources Ltd., [2013] UKSC 34 at 18, ¶ 35.
There may be situations where “depriving the company or its controller of the advantage
that they would otherwise have obtained by the company’s separate legal personality” would not
amount to the same thing as “liability” but in this case, the Trustee has asserted that the Mayers
gained an advantage of evading collection of Subsequent Transfers by liquidating their
businesses and moving shares of the companies into new businesses. In this instance, making
the Mayers “liable” for the Subsequent Transfers is the same as “depriving them of the
advantage they would otherwise have obtained”—that advantage being financial gain. 	Compl. ¶
71 (“[P]ublicly available documents indicate that the Montpellier Group was comprised of
private investment vehicles primarily owned by Rafael Mayer and David Mayer . . . [and] their
family members . . . .”); ¶ 88 (“On September 17, 2010, Montpellier and Prince Resources paid
attorneys for responding to the Trustee’s Rule 2004 subpoenas directed to the Mayers.”)
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If the Trustee can prove, at trial, that a corporate Defendant received the Subsequent
Transfers, he may ask the Court to pierce that corporation’s veil and make either or both of the
Mayers liable for those Subsequent Transfers.
iv. Group Pleading
Defendants argue that Federal Rule of Civil Procedure 9(b) does not permit “group
pleading.” While this is generally true, group pleading is permissible where, like here, the
Complaint “informs each defendant of the nature of his or her alleged participation in the fraud.”
Id. (cleaned up). 	“[N]o specific connection” between the fraudulent behavior and particular
defendants is necessary “where . . . defendants are insiders or affiliates.” DiVittorio v. Equidyne
Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d. Cir. 1987). 	The Court of Appeals for the
Second Circuit reasoned that
where . . . much of the factual information needed to fill out plaintiff's complaint
lies 	peculiarly 	within 	the 	opposing 	parties’ 	knowledge, 	the 	general 	rule
disfavoring allegations founded upon belief ought not to be rigidly enforced. An
example 	is 	the 	shareholder 	derivative 	action, 	in 	which 	the 	complaining
stockholders know little of the ways in which the corporation’s internal affairs are
conducted.
Id. at 1248.
The Trustee has alleged that the Mayers were insiders of the corporate Defendants.
Compl. ¶¶ 10–11. And the Complaint sets forth specific information of the wrong that he is
accusing them of committing. Id. ¶ 5 (“After BLMIS’s fraud was revealed, Rafael and David
Mayer altered the corporate structure of—and ultimately liquidated—Montpellier and Prince to
conceal and prevent the Subsequent Transfers from being returned to the BLMIS estate, and
without providing notice to creditors—chief among them, the Trustee—in the United States.”);
see also id. ¶¶ 68–116 (approximately ten pages of the Complaint are devoted to the wrongs
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committed by the Mayers). No one could have more information regarding the allegations in the
Complaint than the Mayers themselves.
v. Whether the Transfers were made in “good faith”?
At oral argument, the Defendants raised the fact that the Subsequent Transfers occurred
in 2007 and 2008 and that the Trustee has failed to allege that wrongful conduct occurred at the
time of the transfers. Section 550(a) states “[e]xcept as otherwise provided in this section, to the
extent that a transfer is avoided under section . . . 548 . . . , the trustee may recover, for the
benefit of the estate, the property transferred . . . from [an initial or subsequent transferee].”
11 U.S.C. § 550(a). Section 550(b) states “[t]he trustee may not recover” from a subsequent
transferee “that takes for value, . . . in good faith, and without knowledge of the voidability of the
transfer avoided.” § 550(b)(1). “Although § 550(b) is written differently and affects a different
class of transferees than § 548(c), the statutory structure, case law, and legislative history make
clear that good faith under § 550(b) is an affirmative defense.” Picard v. Citibank (In re BLMIS),
12 F.4th 171, 197 (2d Cir. 2021) (the Legacy Capital appeal). The Trustee is not required to
plead Defendants’ lack of good faith. Id. at *18 (“Federal Rule of Civil Procedure 8(c)(1)
provides that, “[i]n responding to a pleading, a party must affirmatively state any avoidance or
affirmative defense,” placing the burden to plead on the defendant.).
IV. Conclusion
For the foregoing reasons, the motions to dismiss are denied. The Trustee shall submit
separate proposed orders, corresponding to each motion, within fourteen days of the issuance of
this decision, directly to chambers (via E-Orders), upon not less than two days’ notice to all
parties, as required by Local Bankruptcy Rule 9074-1(a).
Dated: October 27, 2021
Poughkeepsie, New York
/s/ Cecelia G. Morris
_______________________
Hon. Cecelia G. Morris
Chief U.S. Bankruptcy Judge
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